Sebi mandates registration for execution-only platform providers offering mutual fund schemes
Regulator says individuals who are not clients of such intermediaries will not have protection from risks associated with transactions
- Jun 14, 2023,
- Updated Jun 14, 2023 1:12 PM IST
The guidelines introduced by the Securities and Exchange Board of India (Sebi) will bring a significant change for Execution-Only-Platforms, including PaytmMoney, Groww, Kuvera, and others, that offer direct mutual fund plans. These platforms are now permitted to charge a fixed fee to Asset Management Companies (AMCs). At present, these online platforms rely on cross-selling to generate revenue since direct plans do not earn them any fees. However, it is important to address whether this change will result in expensive direct plans. The answer is no.
Currently, these Execution-only-Platforms (EOPs) tie-up with MF Central, BSEMF or stock exchanges, which in turn charge transaction fees from AMCs. However, now EOPs can directly charge AMCs for direct plans. Hence, direct plans should NOT get costly for investors as it is already part of AMC expenses.
Gaurav Rastogi - CEO & Founder of Kuvera.in said, "Direct plans will NOT become more expensive. Direct platforms currently use BSE or MFU for transaction processing. Both BSE StarMF and MFU charge a transaction fee from AMCs which is already included in AMC expenses. Additionally, EOPs biggest impact is that it separates the frameworks for direct plan execution and advice which was necessary."
Recently, Sebi has implemented a new requirement stating that providers of execution-only platforms (EOPs) must register if they intend to offer services for direct plans of mutual fund schemes. The circular issued on Tuesday stated that no entity shall operate as an EOP without obtaining registration from Sebi or the Association of Mutual Funds in India (AMFI), as the case may be.
Thus, the biggest impact of the guidelines is that it separates the frameworks for direct plan execution and advice, which was necessary.
Sebi further stated that while investors may find it convenient to utilise these online platforms, individuals who are not clients of such intermediaries may not have recourse or protection from the risks associated with their transactions.
“There is no specific framework presently available for technology/digital platforms (including platforms provided by Investment Advisers/Stock Brokers to non-clients) to provide execution-only services in direct plans of Mutual Funds schemes and to obtain data feeds with respect to such transactions. Thus, while the investors may find it convenient to avail of the services of such online platforms, investors who are not clients of such intermediaries under the above-specified Regulations may not have recourse or protection for the risks associated with respect to such transactions. Therefore, a need was felt to strike a balance between investor convenience and investor protection,” the Sebi circular states.
The circular also states that for Category 1 EOPs, the entity must establish agreements with the asset management companies (AMCs) that clearly outline their respective rights and responsibilities regarding EOP services. Additionally, the entity should have an unbiased, equitable, and transparent policy for offering execution services for AMCs' products. As for Category 2 EOPs, the entity must enter into appropriate arrangements with the Stock Exchanges.
"So what does EOP really do? EOP1, wherein fintechs incentivised to create parallel infra to BSE and MFU to get a pie of existing AMC expenses. EOP2, wherein fintechs continue to use exchange infrastructure and offer free service," explained Rastogi.
Moreover, the orders of investors placed through shall be routed directly to the AMCs and/or RTAs authorized. The orders of investors placed through Category 2 EOPs shall be routed through the platforms provided by the Stock Exchanges. The order of the investors placed through both categories of EOPs shall be executed on an immediate basis.
Interestingly, now EOPs cannot do a ranking of the schemes based on their internal report. Also, it cannot display any mutual fund scheme advertisements on its platform—overall positive steps for investors. Sebi has also restricted these platforms to rank the mutual fund schemes for investors.
“Provide an interactive tool for the investors to screen or filter various schemes based on the criteria selected by the investor, including past performance, AUM, etc., and ensure that there is no auto display of recommendation or ranking of any of the schemes. If the criteria for selection include research reports or opinions, the same shall be only by SEBI registered intermediaries, along with suitable disclosures regarding the source. Such research reports or opinions should disclose the methodology used for such recommendations. The aforesaid tool shall not itself provide any research reports or opinions or perform any research-based or investment advisory activity.” states Sebi circular.
The guidelines introduced by the Securities and Exchange Board of India (Sebi) will bring a significant change for Execution-Only-Platforms, including PaytmMoney, Groww, Kuvera, and others, that offer direct mutual fund plans. These platforms are now permitted to charge a fixed fee to Asset Management Companies (AMCs). At present, these online platforms rely on cross-selling to generate revenue since direct plans do not earn them any fees. However, it is important to address whether this change will result in expensive direct plans. The answer is no.
Currently, these Execution-only-Platforms (EOPs) tie-up with MF Central, BSEMF or stock exchanges, which in turn charge transaction fees from AMCs. However, now EOPs can directly charge AMCs for direct plans. Hence, direct plans should NOT get costly for investors as it is already part of AMC expenses.
Gaurav Rastogi - CEO & Founder of Kuvera.in said, "Direct plans will NOT become more expensive. Direct platforms currently use BSE or MFU for transaction processing. Both BSE StarMF and MFU charge a transaction fee from AMCs which is already included in AMC expenses. Additionally, EOPs biggest impact is that it separates the frameworks for direct plan execution and advice which was necessary."
Recently, Sebi has implemented a new requirement stating that providers of execution-only platforms (EOPs) must register if they intend to offer services for direct plans of mutual fund schemes. The circular issued on Tuesday stated that no entity shall operate as an EOP without obtaining registration from Sebi or the Association of Mutual Funds in India (AMFI), as the case may be.
Thus, the biggest impact of the guidelines is that it separates the frameworks for direct plan execution and advice, which was necessary.
Sebi further stated that while investors may find it convenient to utilise these online platforms, individuals who are not clients of such intermediaries may not have recourse or protection from the risks associated with their transactions.
“There is no specific framework presently available for technology/digital platforms (including platforms provided by Investment Advisers/Stock Brokers to non-clients) to provide execution-only services in direct plans of Mutual Funds schemes and to obtain data feeds with respect to such transactions. Thus, while the investors may find it convenient to avail of the services of such online platforms, investors who are not clients of such intermediaries under the above-specified Regulations may not have recourse or protection for the risks associated with respect to such transactions. Therefore, a need was felt to strike a balance between investor convenience and investor protection,” the Sebi circular states.
The circular also states that for Category 1 EOPs, the entity must establish agreements with the asset management companies (AMCs) that clearly outline their respective rights and responsibilities regarding EOP services. Additionally, the entity should have an unbiased, equitable, and transparent policy for offering execution services for AMCs' products. As for Category 2 EOPs, the entity must enter into appropriate arrangements with the Stock Exchanges.
"So what does EOP really do? EOP1, wherein fintechs incentivised to create parallel infra to BSE and MFU to get a pie of existing AMC expenses. EOP2, wherein fintechs continue to use exchange infrastructure and offer free service," explained Rastogi.
Moreover, the orders of investors placed through shall be routed directly to the AMCs and/or RTAs authorized. The orders of investors placed through Category 2 EOPs shall be routed through the platforms provided by the Stock Exchanges. The order of the investors placed through both categories of EOPs shall be executed on an immediate basis.
Interestingly, now EOPs cannot do a ranking of the schemes based on their internal report. Also, it cannot display any mutual fund scheme advertisements on its platform—overall positive steps for investors. Sebi has also restricted these platforms to rank the mutual fund schemes for investors.
“Provide an interactive tool for the investors to screen or filter various schemes based on the criteria selected by the investor, including past performance, AUM, etc., and ensure that there is no auto display of recommendation or ranking of any of the schemes. If the criteria for selection include research reports or opinions, the same shall be only by SEBI registered intermediaries, along with suitable disclosures regarding the source. Such research reports or opinions should disclose the methodology used for such recommendations. The aforesaid tool shall not itself provide any research reports or opinions or perform any research-based or investment advisory activity.” states Sebi circular.